Friday, September 7, 2012

Henry Ford’s Arithmetic Would Cure Budget Deficit

The Financial FAQs

Why don’t Republicans get it? As President Clinton said in his convention speech, there was one word to explain the difference between Republican and Democrats budget proposals—arithmetic. The numbers had to add up, and as a ‘good old boy’ from Alabama, he knew that 2 plus 2 equals 4, whereas Republicans couldn’t, or wouldn’t do the arithmetic.

“We Democrats — we think the country works better with a strong middle class, with real opportunities for poor folks to work their way into it with a relentless focus on the future, with business and government actually working together to promote growth and broadly share prosperity,” he said. You see, we believe that “we’re all in this together” is a far better philosophy than “you’re on your own.”

“So who’s right? Well, since 1961, for 52 years now, the Republicans have held the White House 28 years, the Democrats, 24. In those 52 years, our private economy has produced 66 million private sector jobs. So what’s the job score? Republicans, 24 million; Democrats, 42 (million).”

Even Henry Ford knew his arithmetic back in 1914, said Hedrick Smith in a recent New York Times Op-ed, when Ford raised his employees’ pay to the “unheard of sum of $5 per day” in 1914. Henry Ford knew that boosting his employees’ incomes created more wealth for everyone.

“Not only was it a matter of social justice, Ford wrote, but paying high wages was also smart business,” said Hedrick. “When wages are low, uncertainty dogs the marketplace and growth is weak. But when pay is high and steady, Ford asserted, business is more secure because workers earn enough to become good customers. They can afford to buy Model Ts.”

This incredibly self-evident truth has been lost by the apostles of smaller government, who have not only worked to diminish the role of government, but labor as well with their attacks on collective bargaining and union organizing in general. And that is why the Great Recession is turning into the worst recovery.

“From 1948 to 1973, the productivity of all nonfarm workers nearly doubled, as did average hourly compensation,” said Smith. “But things changed dramatically starting in the late 1970s. Although productivity increased by 80.1 percent from 1973 to 2011, average wages rose only 4.2 percent and hourly compensation (wages plus benefits) rose only 10 percent over that time, according to government data analyzed by the Economic Policy Institute.”

Graph: DShort.com.

Republicans have forgotten Henry Ford, have forgotten that consumers make up 70 percent of all economic activity, and cannot boost the recovery with the diminished incomes of today. In fact, they have been hurt most by pro-business policies that have suppressed wage and salary growth, while lowering tax rates for business and the wealthiest since 1970s.

This is a little-known fact. Consumers have been driving economic growth since the 1920s, when we switched from an industrial society that made things, to a service-oriented economy that serviced people and things, while most manufacturing migrated overseas with its cheaper labor. Historical economists, such as Rutgers’ James Livingston, say that a combination of consumer and government spending created most of the growth between 1900 and 2000, rather than capital investment from the private sector.

Yet, economic growth has declined steadily since the 1970s to its current 3.3 percent annual average. This is at the same time that incomes have skewed upward so that incomes of the top 5 percent of earners have approximately doubled since the 1970s, whereas incomes of the middle and lower quintiles (i.e., 20 percent segments) have basically remained flat.

So conservatives and the even more conservative Republican Party forgot Henry Ford’s arithmetic. Who could afford to buy his Model T’s, otherwise? Big Business has concentrated on enriching themselves, including the investor class and CEOs, while neglecting to build the incomes of the real consumers who generate most effective, or aggregate demand for their goods and services. The resultant income inequality has not only damaged domestic economic growth, but demoralized those consumers who could do most to invigorate the economy.

Graph: DShort.com

This is while corporations have accumulated almost unlimited power over the past 30 years that has given them the highest profits in history as a percentage of GDP. And now the Supreme Court’s Citizen’s United allows them unlimited political contributions to tilt the playing field even more in their favor with the $2 trillion cash hoard accumulated because of those profits.

This should be a no-brainer, getting the arithmetic . Big Business interests should know that spreading their wealth around would further enrich themselves as well, but they got into the lobbying business in a big way, which is documented in Jacob S Hacker and Paul Pierson’s Winner Take All Politics, How Washington Made the Rich Richer—and Turned Its Back on the Middle Class, and now effectively control two branches of government.

So part of the solution is obvious, at least. Get the arithmetic right. Restore to government its necessary powers to regulate the economy, maintain the safety net and, yes, re-distribute wealth to where it will do the most good—raise our educational standing in the world, boost research and development that we may retain our technological leadership as Henry Ford envisioned so long ago, and above all look out for the welfare of all wage earners, not just the few.

Harlan Russell Green, Editor/Publisher

Harlan Green is a Mortgage Broker in Santa Barbara, California since the 1980s and economist. As Editor/Publisher of PopularEconomics.com, he has published 3 weekly columns-- Popular Economics Weekly, Financial FAQs, and The Mortgage Corner-since 2000, and is a featured business columnist for Huffington Post. Please refer to the populareconomics.com website for further information.